Operation Rotation: Macro Overview

The current challenge for investors is how to trade off short-term uncertainty with their long-term investment goals.

Walking the Tightrope

The short term remains uncertain. A US recession appears less likely now but a material slowdown should still be expected and this has the potential to cause more market volatility, particularly given the sharp bounce back and elevated valuations in markets. But this needs to be balanced against the opportunities created by a range of compelling, enduring structural changes that will continue to create opportunities for investors, most notably developments in Artificial Intelligence (AI) and the Clean Energy Transition.

Storms Clearing… For Now

Markets have responded positively as the risks from the trade war and US Government austerity have faded. This has reduced the risk of a US recession. The economy has also proved to be relatively resilient so far with no major deterioration in key parts of the economy.

Nevertheless there are lingering risks, mostly to consumer spending and corporate earnings, which still have the potential to derail investor sentiment. Consumers will suffer the biggest hit from tariffs. Company earnings are also under threat, particularly in consumer-facing industries that may not be able to fully pass on tariff increases.

Big Themes, Bigger Opportunities

This macro uncertainty has the potential to affect equity markets but investors must balance this risk against their long-term investment goals and a number of significant secular economic changes that are underway and that will create a range of opportunities. The most prominent of these is Digital Disruption, as artificial intelligence technologies drive innovation and transform industries, creating significant opportunities for growth. The second major trend is investment to support the Clean Energy Transition, as governments and companies shift towards low-emissions technologies and infrastructure in response to climate commitments and changing energy demands. The third major trend is Health Innovation, driven by ageing populations and advances in biotechnology. We anticipate these long-term themes will support growth and provide opportunities, even amid current uncertainties.

Power Surge

AI-related capex is now so large it will be an offset to weakness in other parts of the economy. Investment by the four major companies (Microsoft, Google, Meta and Amazon) has escalated rapidly and is forecast to be $325 billion in 2025 which is more than 1% of overall annual US GDP. This reflects accelerating adoption of AI across a broad range of industries, particularly finance, education, retail and health care.

As AI technology continues to evolve, its impact on various sectors will only grow, driving further advancements and adoption. There is a further impact on the economy through the electricity sector. Data centres, machine learning algorithms and autonomous systems require substantial computational power, leading to increased electricity consumption. 

The boost to electricity demand for AI is occurring at the same time as a major investment wave in renewable energy gets underway. The clean energy transition and drive towards net zero emissions is poised to have a profound impact on the global economy and create new opportunities.

Final Thoughts

The best way to navigate this environment is to have some extra cash to take advantage of any opportunities, diversify to reduce the impact of volatility and look for beneficiaries from developments in Digital Disruption, Clean Energy Transition and Health Innovation. These may not be in listed markets and will be spread across geographies.